2025 High Yield Bond Forecast: Continued Growth and Opportunities
hart showing falling distress ratio”,”disclosure”:”Source: ICE Data Indices LLC. Data as of December 31, 2024. U.S. high yield is the ICE BofA U.S. High Yield Constrained Index. The distress ratio is the par value trading at a credit spread of 1,000 basis points (bps) or greater. Past performance is not a reliable indicator or guarantee of future results. Due to market volatility, the asset class depicted in this chart may not perform in a similar manner in the future. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.”},”warning”:””}
2024 was a strong year for risk-asset returns, and U.S. high yield was no exception, with returns of 8.2%. This trend was led by CCCs, which returned 16.4%. Bank loans also performed well, slightly outpacing high yield bonds at 9.0%. The resilience of leveraged credit was evident throughout the year.
Starting off 2024, some investors had concerns about the potential impact of the Fed’s hiking campaign on economic growth. However, credit spreads across investment grade and high yield are now near multi-year tights, with many predicting supportive growth ahead. The Fed’s stance is expected to be less dovish going forward.
Looking ahead, high yield credit is expected to deliver solid returns in the coming year. Despite debates about whether all-in yields or credit spreads matter more to investors, the declining default rate in 2024 resulted in lower default loss than anticipated. This suggests that forward returns, based on current yields, could be promising.
Forecasts indicate a further decline in the default rate for 2025. By focusing on the distress ratio, which measures the portion of the high yield market trading at a credit spread of 1,000 basis points or greater, we can estimate a default rate slightly above 1% for the year. This is in line with the previous year and below the long-term average.
Overall, the supportive macro environment, disciplined corporate behavior, and accommodative financial conditions point towards low default loss in the upcoming year. While there are risks to this positive outlook, including credit destructive behavior by issuers and regulatory uncertainty, high yield credit is positioned for another year of strong performance.
